Presidential Address: Liquidity and Price Discovery
Cornell University - Samuel Curtis Johnson Graduate School of Management
Journal of Finance, Vol. 58, pp. 1335-1354, August 2003
This paper examines the implications of market microstructure for asset pricing. I argue that asset pricing ignores the central fact that asset prices evolve in markets. Markets provide liquidity and price discovery, and I argue that asset pricing models need to be recast in broader terms to incorporate the transactions costs of liquidity and the risks of price discovery. I argue that symmetric information-based asset pricing models do not work because they assume that the underlying problems of liquidity and price discovery have been solved. I develop an asymmetric information asset pricing model that incorporates these effects.
Accepted Paper Series
Date posted: November 4, 2003
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